Kirk Maldonado

I can't really respond authoritatively to that question, other than to say that my prior answer should have been that the 1099-R should be limited to the correct amount. Thus, if the participant rolled over the entire distribution to an IRA, the participant most likely made an excess contribution. I don't know how the excess amount should be reported.

Don't forget that the distributee should get a 1099-R for the full amount of the distribution, at least if the distributee does not repay the unvested portion.

RLL: That's what my stockbroker always tells me, so it must be true.

In response to RLL, I agree that if the stock does appreciate, then the fiduciary would be vulnerable to criticism using 20-20 hindsight. However, the other opposite scenario needs to be considered. If the employer goes bankrupt before the end of the term of the loan, the participants get nothing. In this situation, the participants would have been better off if the stock had been sold in satisfaction of the debt, and the ESOP terminated at that time. At least they would get the value of the shares that were allocated to their accounts at the time of the termination of the ESOP, which is better than what they would get if the ESOP is continued and the employer goes bankrupt (i.e., nothing). I guess my position isn't quite as different than RLL's than might appear at first. For one thing, I don't disagree that it is best to use an independent fiduciary in these circumstances. My quarrel is that I can rationalize a fiduciary deciding to sell the stock held by an ESOP sponsored by an employer that is rapidly imploding. In my scenario, in exchange for agreeing to sell the stock in satisfaction of the debt, the ESOP participants get (1) full vesting and (2) payment of the fair market value of the stock at that time. Given the fact that it is entirely possible that the employer may go bankrupt before the loan would otherwise be paid off, I think it is better to get something for the ESOP participants (by terminating the ESOP now) rather than having them be exposed to the real risk that they may lose everything if the employer goes bankrupt. Finally, I want to emphasize that the facts that I am positing are quite different than the original message posted here. [This message has been edited by Kirk Maldonado (edited 05-02-2000).]

RLL: I think that you are assuming that, as is usually the case, the employer is obligated to make contributions to the plan to amortize the loan. However, I've seen many ESOP transactions where the employer did not undertake any such amortization obligation. If the employer is not obligated to and does not make any additiopnal contributions, the rest of the shares will not be released (at any time). Thus, in this case, the participants would not receive any additional shares. Accordingly, in this situation, whether the plan is terminated currently or kept alive on life support, the employees do not get any more allocations. However, when the shares are sold for the amount of the debt, the plan can be terminated currently. Otherwise, in most situations, the plan will need to be continued until the expiration of the loan repayment period. The ability of participants to receive a distribution in the near future, as opposed to having to wait at least 5 years in the future, seems to be in the interest of the employer. Also, in most of these situations that I've been involved in, the employer's financial (and perhaps physical) health is deteriorating, often at a rapid pace. Shutting down the ESOP now, while the stock still has some value, may be more favorable to the participants than waiting for five years, at which time the employer may be insolvent so that participants get nothing for the shares in their accounts. To say the very least, these are not pretty pictures. However, sometimes you have to try to salvage something for the participants. Simply terminating the plan and accelerating the repurchse obligation is a benefit to the participants. The financially strapped employer would prefer not to expend its scarce financial resources buying its stock back from the ESOP participants. The employer would rather gamble, hoping that either (1) the situation will improve, so that it will be in a better position to fund the repurchase obligation, or (2) the employer goes bankrupt, so that the repurchae obligation goes away entirely.

While the IRS can be unpredictable, I think that the likelihood of an imputed annual additions challenge is slim, in my particular situation. Before the transaction, the ESOP had stock worth $3 burdened with a debt of $10 per share. Afterwards, the ESOP had nothing (attributable to those shares). This is very different from the situation where the employer pays too much for the stock and the excess cash proceeds get allocated to participants' accounts. In that regard, I think two points are worth noting. First, the employer could have written down the debt to $3 per share. That would certainly mitigate the imputed annual additions problem. Second, if the employer had actually contributed the $3 per share to the plan, that would have definitely caused annual additions in that amount, but the participants would have received stock equal to that amount. In my situation they receive nothing (attributable to those shares). Also, while I agree that having an independent fiduciary negotiate the arrangement minimizes the risk of imputed annual additions, I don't think that the presence of the independent fiduciary completely eliminates it. As a result of good negotiating position, it is possible that an independent fiduciary could get the employer to pay more than the fair market value of the stock. I have seen that happen before. [This message has been edited by Kirk Maldonado (edited 05-01-2000).] [This message has been edited by Kirk Maldonado (edited 05-01-2000).] [This message has been edited by Kirk Maldonado (edited 05-01-2000).]

Being exempt from ERISA is not always a blessing. That means that you are subject to State law. Being subject to California law (e.g., punitive damages) can be much worse than anything that can happen to you under ERISA.

RLL: Would you feel that an independent fiduciary would be necessary [/i] (as opposed to being merely advisable) if the employer were to pay a big premium over what the stock is currently worth? For example, assume that the ESOP bought the stock for $10, but it is only worth $3 today. What if the employer were willing to cancel the entire debt of $10 per share if the plan surrendered the stock currently worth only $3 per share. Would you still feel an independent fiduciary is necessary or is merely advisable under these facts?

Have you looked at the IRS private letter rulings to see if there is any relevant guidance? Have you checked the DOL Advisory Opinions regarding the same?

I disagree with your analysis about primarily invested. The rule is that the plan must be designed to be primarily invested in employer stock. It does not say that the plan assets must actually be primarily invested in employer stock.

Have you considered the federal and state securities laws implications as well as the accounting consequences?

Besides a participant lawsuit, if I were you, I'd also worry about DOL enforcement activity. The failure to forward deferrals is a real hot button for them.

There is a risk that the IRS would attempt to disqualify the plan because of this. You should consider submitting the plan to the IRS under the VCR program. However, you probably need more facts to make a final determination on this issue.

A cafeteria plan adopted on retroactive basis was disqualified in American Family Mutual Ins. Co. v. U.S. , DC W Wis. 12/3/92, 16 EBC 1332, 815 F. Supp. 1206.

I found it. Thanks.

What is your authority for using a 333 number for a multiple employer plan? For example, the instructions to the Form 5500 say to use 001, etc. for pension plans and 501, etc. for welfare plans. I've never heard of using a 333 number, and I'm interested in the authority for that numbering sytem. [This message has been edited by Kirk Maldonado (edited 04-21-2000).]

I don't think that the DOL had the authority before 1988 to assess any penalties. I seem to recall that they had to amend ERISA to provide them with authority to assess penalties in this situation.

Kip is right. I seem to recall that there is at least one DOL Advisory Opinion on point as well as one or two court cases.

Check out PLR 9431021.

A better place for this inquiry is the message board entitled "retirement plan loans and distributions'"

My mistake. When I read "partial distribution," I thought the reference was to in-service distributions of some or all of the account balance that the participant could voluntarily elect to make unassociated with those required by Section 401(a)(28). Those provisions are fairly typical, for example, in Section 401(k) plans. I (obviously incorrectly) didn't interpret the language to refer to installment distributions after termination of employment. I think of those as being "total" (not partial) distributions, just spread over a period of time. It appears that my terminology is not consistent with that of the other readers of BenefitsLink.

I do a lot of ESOP work and I can't recall ever seeing a plan that provides for partial distributions other than those required by IRC Section 401(a)(28).

I think you have a Section 411(a)(11) issue.

I agree with everything that PJK stated. Also, as a practical matter, I don't think that you will be able to get a broker involved if the stock is not publicly traded.

You might want to try the website for the National Association of Stock Plan Professionals, which is http://www.naspp.com/. However, you might have to be a member to post a question. I think that you would find joining that organization to be very worthwhile.